Bi-weekly Seminar Series

Abstract

We build a simple banking firm model to understand why Chinese banks sell wealth management products (WMPs). Such products are supposed to be pooled investments in which banks only serve as the “agent”, but we argue that WMPs are more similar as non-checkable deposit than as investment funds.

Since WMPs can be off-balance-sheet, it is widely suspected that regulatory arbitrage is the main motivation behind Chinese banks’ issuance of WMPs. Particularly, it is suggested that banks sell WMPs mainly to evade the 75% cap on the loan-to-deposit ratio. However, evidence shows that the 75% cap is not binding for the majority of banks who issue WMPs. We argue that banks sell WMPs mainly because they have few options to borrow with terms from one month to a year. Based on this idea, we derive model implications, and we empirically test these implications.